Practical Accounting 2

Advance Financial Accounting Vol. 2

 Advance Accounting Vol. 2
1. Home Office and Branch Accounting
General Procedures
2. Home Office and Branch Accounting Special
Problems
3. Business Combinations
4. Consolidated Balance Sheet Date of
Acquisition
5. Consolidated Financial Statements
 Advance Accounting Vol. 2
6. Intercompany Profit Transactions
Inventories
7. Intercompany Gain Transactions Plant
Assets
8. Accounting For Foreign Currency Transactions
9. Translation of Foreign Entity Statements
 Advance Accounting Vol. 2
1. Home Office and Branch Accounting
General Procedures

Accounting for Sales Agency

1. Determine NOT Separately the Net Income
2. Determine Separately the Net Income
 Advance Accounting Vol. 2
1. Sales Agency - Determine NOT Separately
the Net Income
The transactions of the Sales agency are
recorded in the Home Office's own revenue
and expense accounts.
When the Home Office transfers fixed assets
to Sales Agency.
 Advance Accounting Vol. 2
1. Sales Agency - Determine Separately the
Net Income
Transactions Home Office Books (Entries)

Working Fund Established Working Fund - Sales Agency xx

Cash xx

Shipped Merchandise to Agency as Samples Inventory - Agency xx

samples Shipments TO Agency xx

Filled Sales orders from Agency Accounts Receivable xx

Sales - Agency xx

Cost of Inventory Identified COGS - Agency xx

Shipments TO Agency xx
[ if Periodic]

COGS - Agency xx
Merchandise Inventory xx
[ if Perpetual]

Replenishment of Working Fund Various Expense Accounts xx

Cash xx

To Close Revenue and Expense Sales - Agency xx

COGS - Agency xx
Various Expense Accounts xx
Income - Agency xx

To close Income Summary Account Agency Income xx

Income Summary xx
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Observation
At the end of accounting period, the account Shipments
of Merchandise - Agency is deducted from the total of
Beginning Inventory and Purchases to determine the
GAS by the home office for its operations.
Sales Agency neither keeps a complete set of books nor
uses a double entry systems accounts. An Imprest
System is usually adopted by the Home Office for the
working fund of the sales agency.

THEY MAINTAIN SAMPLES INVENTORY

 Advance Accounting Vol. 2
Accounting for Branch
Home Office Books Branch Books

Investment in Branch Home Office

xx Asset/ Expense to Branch xx

(Investment)
xx Asset/ Expense from Branch xx
(Withdrawal)
xx Branch Profit xx
xx Branch Loss xx
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TRANSACTIONS
Established of Branch
Investment in Branch xx Cash xx
Cash xx PPE xx
PPE xx Home Office xx

Recognition of Branch Income or Loss

Investment in Branch xx Income Summary xx
Branch income xx Home Office xx
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Merchandise Shipments to a Branch:
From Outside Parties:
Purchases xx
NO ENTRY Accounts Payable xx

From Home Office Billed at Cost with Freight Charges:

Investment in Branch xx Shipments from HO xx
Shipments to Branch xx Freight-In xx
Cash xx Home Office xx
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Branch PPE
Case A: Plant Assets are recorded in the books of the
Branch but purchased by the Home Office for the
Branch
Investment in Branch xx PPE xx
Cash xx Home Office xx
Case B: Plant Assets are recorded in the books of the
Home Office but purchased by the Home Office for
the Branch
PPE - Branch xx NO ENTRY
Cash xx
 Advance Accounting Vol. 2
Case C: Plant Asset are recorded in the books of the
Home Office but purchased by the Branch for the
Branch
PPE - Branch xx Home Office xx
Investment in Branch xx Cash xx
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Observation
1. Freight Costs incurred in shipping merchandise
from the HO to Branch become part of the cost of
the branch inventory.
2. Shipments to Branch is subtracted from the total
of beginning inventory and purchases in the
computation of home office's COGS for the period.
3. Shipments from Home Office account on the
branch books is included in the computation of the
branch's COGS as an addition to purchases.
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Observation
4. The HO Shipments to Branch and branch Shipments
from HO account are nominal accounts and
therefore closed at the end of the period to
Income Summary account together with the
revenue and expense accounts.
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TRANSACTIONS
Apportionment of Expenses:
Utilities Expenses (Expenses incurred by branch and billed to HO
account)
Depreciation Expenses (Branch Plant Assets carried on HO books)
Advertising Expenses (Allocated to Branch)

Investment in Branch xx Utilities Expenses xx

Utilities Expenses xx Depreciation Expenses xx
Depreciation Expenses xx Advertising Expenses xx
Advertising Expenses xx Home Office xx
 Advance Accounting Vol. 2
Observation

Not Only Assets can be transferred BUT ALSO the

allocated expenses.

Elimination Entries:
Reciprocal Accounts: Home Office xx
Investment in Branch xx

Shipments of Merchandise Shipments TO Branch xx

Shipments FROM ho xx
RECONCILIATION OF RECIPROCAL ACCOUNTS
(Common Errors) Investment in Branch Home Office
Balances Before Adjustments xx xx
Additions:
(1) Merchandise Shipped to Branch
STILL IN TRANSIT xx

(4) Receivable of HO collected by

Branch xx
Total xx xx
Deductions:
(2) Receivable of Branch collected
by Home Office (xx)

(3) Office Equipment purchased by

the branch (xx)

(5) Errormade by branch in recording

expenses. xx
Adjusted Balances xx MUST BE EQUAL xx
 Advance Accounting Vol. 2
2. SPECIAL PROBLEMS - BRANCH ACCOUNTING
1. Merchandise Shipments to Branch at price in
excess of cost, @ billed price
2. Inter-branch Transfers of Cash
3. Inter-branch transfer of Merchandise.
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2. SPECIAL PROBLEMS - BRANCH ACCOUNTING
1. Merchandise Shipments to Branch at price in
excess of cost, @ billed price
When billings to the branch exceed cost, the
profits determined by the branch will be less than
actual profits.
Inventories reported by the branch are overstated
in as much as they were valued based on the billed
price, NOT THEIR COST.
 Advance Accounting Vol. 2
Home Office Books Branch Books

Investment in Branch Home Office

Investment in Branch xx Shipments from HO xx

Shipments to Branch xx Home Office xx
Allowance for Overvaluation xx
of Branch Inventory

To Close:

Allowance for Overvaluation

of Branch Inventory xx NO ENTRY
Branch Income xx
 Advance Accounting Vol. 2
FORMULA:

Approach A

REALIZED PROFIT= Cost of Goods Sold by Branch Balance of Allowance for

X
Good Available for Sale Overvaluation of Branch Inventory
(acquired from HO) (Unrealized Profit)
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Approach B

Balance of Allowance for Overvaluation

of Branch Inventory Account(Unrealized Profit) xx

Less: Overvaluation of Ending Inventory(Branch)

Billed Price xx
Cost [Billed Price / (1+ Mark Up %)] (xx) (xx)
Realized Profit xx
 Advance Accounting Vol. 2
Observation

Home Office records the overvaluation.

Allowance for Overvaluation of Branch Inventory is also called Unrealized Profit in

Branch Inventory.

Branch Income is NOT CLOSE to Investment in Branch; might result to unbalanced

amount.

Only the reported income or loss of branch is closed to Investment in Branch.

Allowance for Overvaluation will remain until the shipment is shifted is reshipped or
sold by the branch to outsiders. (Unrealized Realized Profit)
 Advance Accounting Vol. 2
Elimination Entries:

Reciprocal Accounts: Home Office xx

Investment in Branch xx

Transfer of Merchandise between Home Office & Branch

Shipments TO Branch xx
Allowance for Overvaluation
of Branch Inventory xx
Shipments FROM ho xx
To carry the Inventory (Branch) @ Cost

Inventory End (Income Statement) xx

Inventory End (Balance Sheet) xx
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Observation
On the 1st year, the elimination of the intercompany
shipments requires the complete elimination of
Unrealized Profit account, because there's NO
Beginning Inventory.
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TREATMENT OF BEGGINNING BILLED ABOVE COST
Table in bringing the cost of inventory @ COST

BILLED PRICE COST OVERVALUATION

Beg. Inventory xx xx xx
Add: Shipments from Home Office xx xx xx
Available For Sale xx xx xx Unrealized Profit
Less: Ending Inventory (xx) (xx) (xx)
Cost of Goods Sold xx xx xx Realized Profit
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Approach A

(GAS @ Billed Price - Ending Invty @ Billed Price)

REALIZED PROFIT= Cost of Goods Sold by Branch Balance of Allowance for
X
Good Available for Sale Overvaluation of Branch Inventory
(acquired from HO) (Unrealized Profit)
(Beg. Inventory @ Billed Price +
Shipments from HO @ Billed Price)
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Approach B

GAS Overvaluation xx

Less: Overvaluation of Ending Inventory(Branch)

Billed Price of Ending Inventory xx
Cost of Ending Inventory (xx) (xx)
Realized Profit xx
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Observation
Realized Profit is the amount that Branch Net Income
is Understated

Concern means TRUE

 Advance Accounting Vol. 2
TRANSACTIONS BETWEEN BRANCHES
Inter-branch Transfers of Cash
Accounting Rule: The Branch will clear such transfer
through its Home Office Account
Transactions:

Home Office Branch A Books Branch B Books

Investment in
Branch B xx Home Office xx Cash xx
Investment in Cash xx Home Office xx
Branch A xx
 Advance Accounting Vol. 2
Inter-branch Transfers of Merchandise
Accounting Rule:
Branches SHOULD NOT CARRY an account with another
branch but should be clear the transfer through its
Home Office account.
Freight on Goods received by the branch directly from HO
are properly included in the cost of branch inventory,
but the transfer of merchandise from one branch to
another does not justify increasing the inventory value
by the additional freight costs incurred because of the
indirect routing
Excess freight costs should be absorbed by the Home
Office and treated as Expense.
 Advance Accounting Vol. 2
Explanation to the Accounting Rule:
Recording as an expense the excess freight cost on
merchandise transferred from one branch to
another is a manifestation of the accounting
principle that losses should be given prompt
recognition.
The excess freight cost arising from such shipments
generally is a result of inefficient planning of
original shipments and therefore should not be
included in inventories.
Transactions:

Home Office Branch X Books Branch Y Books

Shipment of Merchandise

Investment in Shipments from HO xx Shipments from HO xx

Branch X xx Freight-In xx Freight-In xx
Shipment to Home Office xx Home Office xx
Branch X xx
Cash (freight) xx

Order to Transfer

Shipment to xx Home Office xx

Branch X Shipments from HO xx
Shipment to xx Freight-In xx
Branch Y Cash xx

Investment in Brach Y xx
Interbranch Freight Expense xx
Investment in Brach Y xx
 Advance Accounting Vol. 2
Branch True Income Statement (T-account)
Investment in Branch

Branch Beg. Inventory Sales xx

at Billed Price xx
Branch Ending Inventory
Purchases from Outsiders xx at Billed Price xx

Shipments from HO Branch Beg. Inventory

at Billed Price xx [Unrealized Profit] xx

Operating Expenses xx Shipments from HO

Freight-In xx [Unrealized profit] xx

Branch End Inventory xx

[Unrealized Profit]

TRUE LOSS TRUE PROFIT

 Advance Accounting Vol. 2
HOME OFFICE

Sales xx
Beginning Inventory xx Ending Inventory xx
Purchases xx Shipments to Branch xx
Freight-In xx Branch Income xx
Operating Expenses xx
Branch Loss xx

COMBINED LOSS COMBINED INCOME

 Advance Accounting Vol. 2
NOTE:

BILLED PRICE:

Shipments FROM Home Office

Shipments TO Branch

Allowance for Overvaluation of Branch Inventory

Realization of % mark-up xx Beginning Balance xx

on merchandise sold by branch
(mark up beg. & shipment from
HO inventories)
(Mark-up on Beg. Inventory)
Mark-up on merchandise xx
shipped to branch during
current year.

Ending Balance xx
(mark-up on ending inventory)
End Of Home and Branch Accounting